The Council of the Corporation Law Section of the Delaware State Bar Association (Council) released its proposed amendments to the DGCL. If approved by the Delaware legislature, most of the amendments would become effective on August 1, 2016. The amendments address, among other things, mergers under Section 251(h) of the DGCL, new limitations on appraisal rights, and expanded jurisdiction of the Delaware Court of Chancery.

The 2016 proposed amendments on appraisal rights are almost identical to those proposed by the Council last year, which were never introduced in the Delaware Assembly. The goal of the proposed amendments is to respond legislatively to the rise of the "appraisal arbitrage" tactic, in which hedge funds acquire shares in the merging company for the express purpose of seeking appraisal. Another aim of the amendments is to relieve judges from having to decide between two competing valuation experts, particularly when the market has already established a value for the shares. To those ends, the amendments to the appraisal statute would:

The proposed amendment to Section 262(h) that provides for accrual of interest on the interest already accrued is the only way in which this year's proposed amendments to the appraisal statute differ from the 2015 version. The 2016 amendments are otherwise identical to the 2015 proposal.

The amendments to Section 262(g) establish a de minimis exception of $1 million at stake for the exercise of appraisal rights against a publicly traded corporation. This floor minimizes the risk that appraisal will be used to obtain a settlement because of the nuisance value of litigation. The Council also takes the view that a stockholder should not have a right to judicial determination of value if 99 percent of the stockholders have accepted the merger consideration or the amount in dispute is less than or approaching the cost of litigation. The de minimis exception will not apply, though, to short-form mergers under Section 253 or 267 because appraisal in these circumstances may be the only remedy available.

The amendments to Section 262(h) address the concern that the statutory interest rate encourages interest arbitrage by appraisal claimants because the statutory rate has been higher than money market and government yields. While the Council did not find empirical support for the existence of interest arbitrage, it determined that corporations should have the option to stop the accrual of interest during the appraisal proceedings by paying an amount of its choosing to the appraisal claimants. Interest will thereafter only accrue on the sum of the interest already accrued at the time of the payment plus the amount of the judicial award that is in excess of the amount already paid.

As in 2015, the proposal does not attempt to change the definition of the term "stockholder" to capture beneficial stockholders. This leaves untouched the Delaware Court of Chancery's interpretation of the statute, first described in its 2007 Transkaryotic decision and reiterated several times since, that the stockholder seeking appraisal does not itself have to have held its shares as of the record date for the vote on the merger (see Practice Note, Appraisal Rights: Stockholders Entitled to Appraisal). The proposed amendments would only limit appraisal on the basis of the de minimis exception and other grounds described above.

The amendments to the appraisal statute, if adopted, would become effective only with respect to transactions closed under agreements entered into on or after August 1, 2016. They would not affect pending litigation.

In 2013, Section 251(h) of the DGCL was added to eliminate the stockholder-approval requirements on back-end mergers after a tender offer and obviate the need for a top-up option in merger agreements. The amendments provided that stockholders of a constituent corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders no longer have to approve certain mergers if a statutorily defined minimum number of shares is tendered in a tender or exchange offer under certain circumstances. The 2016 proposed amendments widen the availability of the Section 251(h) process to buyers and target corporations that were previously ineligible to use it. The amendments would:

These amendments, if adopted, would become effective only with respect to merger agreements entered into on or after August 1, 2016.

The proposed amendments would expand the Delaware Court of Chancery's subject matter jurisdiction. Currently, under Section 111 of the DGCL, the Chancery Court has jurisdiction over any civil action brought to interpret, apply, enforce, or determine the validity of the provisions of the certificate of incorporation or by-laws of a Delaware corporation, as well as any instrument, document, or agreement by which a corporation creates or sells, or offers to create or sell, any of its stock, or any rights or options respecting its stock. Under the proposed amendments, the Chancery Court would also have subject matter jurisdiction over civil actions involving instruments, documents, or agreements by which:

This amendment, if adopted, would become effective August 1, 2016.

Under the current version of Section 158 of the DGCL, a holder of certificate shares is entitled to have the stock certificates signed by a member of each of the following two groups:

Out of a recognition that many corporations have done away with the roles of president and treasurer in favor of a CEO and CFO, the proposed amendments would remove the designated offices from the statute and allow any two authorized officers of the corporation to sign the stock certificates.

This amendment, if adopted, would become effective August 1, 2016.

The proposed amendments would amend Section 141 of the DGCL to specify default voting and quorum requirements for board committees and subcommittees. Under the amended statute, a majority of the directors serving on the committee or subcommittee would constitute a quorum of that committee. This is a default rule that can be adjusted in the certificate of incorporation, by-laws, board resolution creating the committee, or committee resolution creating the subcommittee. In no event, however, can a quorum be less than one-third of the directors serving on the committee or subcommittee.

The proposed amendments would also clarify that the vote of a majority of the directors present at the meeting of the committee or subcommittee would be deemed the act of the committee or subcommittee, unless the certificate of incorporation, by-laws, board resolution creating the committee, or committee resolution creating the subcommittee provides for a greater number.

These amendments, if adopted, would become effective August 1, 2016.

The proposed amendments would amend Section 311 of the DGCL to:

Section 312 of the DGCL is being amended to distinguish between the procedures to:

The procedure for extending a corporation's duration is now solely governed by Section 242 of the DGCL. Section 312 does not apply if the corporation's certificate of incorporation has been forfeited or revoked by the Chancery Court under Section 284 of the DGCL.

The proposed amendments also provide that a majority of directors then in office, even if less than quorum, or the sole director in office, may authorize the revival of the certificate of incorporation.

These amendments, if adopted, would become effective on August 1, 2016.